Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective

Transcription

1 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective Markus Krajewski EU Office Brussels

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3 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective Markus Krajewski Friedrich-Alexander-Universität Erlangen-Nürnberg

4 2 FRIEDRICH-EBERT-STIFTUNG Abbreviations BIT CETA FDI FET FTA GATT GATS ILO ISDS MFN NAFTA NGOs OECD TTIP UNCITRAL UNCTAD WTO Bilateral Investment Treaty Comprehensive Economic and Trade Agreement (EU-Canada) Foreign Direct Investment Fair and Equitable Treatment Free Trade Agreement General Agreement on Tariffs and Trade General Agreement on Trade in Services International Labour Organisation Investor-State Dispute Settlement Most Favoured Nation North American Free Trade Agreement Non-governmental organisations Organisation on Economic Cooperation and Development Transatlantic Trade and Investment Partnership (EU-US) United Nations Commission on International Trade Law United Nations Conference on Trade and Development World Trade Organization Impressum: Friedrich-Ebert-Stiftung EU Office Brussels Rue du Taciturne Brussels Tel : +32(0) Fax : +32(0) fes@fes-europe.eu Editor: Prof. Dr. Markus Krajewski Layout: Pellens Kommunikationsdesign GmbH Cover Photo: Euroean Union Printing: bub Bonner Universitäts-Buchdruckerei ISBN: Commercial use of all media published by the Friedrich-Ebert-Stiftung (FES) is not permitted without the written consent of the FES.

5 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 33 Table of contents Abbreviations... 2 I. Introduction and Background... 4 II. General assessment of investment protection and ISDS... 6 III. Necessity of investment protection in TTIP or CETA in particular... 8 IV. Substantial aspects of investment protection Scope... 9 a) Investment... 9 b) Investor Non-discrimination a) Most-favoured-nation treatment b) National treatment c) Exceptions Fair and equitable treatment (FET) Expropriation Right to Regulate V. Procedural aspects of investment protection: ISDS Transparency in ISDS Selection and qualification of arbitrators Relationship of ISDS and domestic courts Further elements of ISDS a) Rejecting frivolous and unfounded cases...19 b) Guidance by the parties through binding interpretations c) Appellate Mechanism VI. Missing elements VII. Conclusion and summary of main findings... 23

6 4 FRIEDRICH-EBERT-STIFTUNG I. Introduction and Background The impact of international treaties protecting foreign investment on a state s ability to regulate and intervene in the economy from a public interest perspective has been the subject of academic debates since the late 1990s. 1 However, it was the debate surrounding an investment protection chapter in the planned Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States which moved this issue to the centre of a heated public debate. In the light of the increased critique of investment protection in the TTIP, especially provisions establishing a system of Investor-state dispute settlement (ISDS), the European Commission decided in January 2014 to launch a public consultation on investment protection in the TTIP. 2 Between 27 March and 13 July 2014, members of the public were invited to reply to a set of thirteen questions addressing specific elements of the investment chapter in TTIP. These questions were illustrated and explained using examples of text taken from the recently negotiated Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. 3 The consultation generated almost 150,000 online contributions. The largest number of replies came from the United Kingdom, Austria and Germany. Most contributions were submitted by individuals and in many cases were submitted collectively through coordinated actions. 569 organisations, including many NGOs, also responded. 4 The responses to the consultation have not yet been published as the European Commission is still reviewing and analysing the results. According to the Commission, the responses will be analysed during the coming months and a report on the results will be published towards the end of Irrespective of the conclusion drawn by the Commission on the basis of the consultation, the debate about the impact of investment protection in the TTIP on regulatory autonomy is set to continue. The present study will therefore address the issues raised during the consultation in a broader context and discuss in particular the impact of investment protection on social and labour regulation and the autonomy of the social partners in regulating these matters through collective agreements. The study begins with a general assessment of the system of investment protection and ISDS in international agreements (II.). This is necessary even though the EU consultation document did not specifically invite answers to the general question as to whether such a system was desirable. However, any attempt at a thorough analysis of the pertinent issues would be incomplete without discussing this general question first. The study will go on to address specifically the necessity of investment protection in a EU-US agreement (III.). The study then moves on to cover specific aspects of the system of 1 Titi, The right to regulate in international investment law, European Commission, Commission to consult European public on provisions in EU-US trade deal on investment and investor-state dispute settlement, 21 January 2014, 3 Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), 4 European Commission, Preliminary report (statistical overview), Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), 18 July 2014, doclib/docs/2014/july/tradoc_ pdf. 5 Investment protection and ISDS in TTIP EU starts reviewing survey results, 14 July 2014,

7 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 55 investment protection and shall offer up a discussion on the problems and possible solutions to particular elements of investment protection. These parts of the study follow the structure of the consultation document which in turn follows the general structure of a bilateral investment treaty (BIT) or an investment protection chapter in a free trade agreement such as NAFTA or the proposed TTIP. Consequently, the study addresses a number of substantial elements (IV.) as well as aspects of ISDS (V.). Part VI of the study discusses elements that are missing from the EU approach. The study concludes with a summary of its main findings and recommendations (VII.).

8 6 FRIEDRICH-EBERT-STIFTUNG II. General assessment of investment protection and ISDS Although a number of elements of the current system of investment protection in international law can be traced back to the Friendship, Navigation and Commerce Treaties of the 19 th and 20 th centuries, the first modern investment treaty which became the model of many treaties was the 1959 Bilateral Investment Protection Treaty between Germany and Pakistan. Most substantive elements of contemporary investment protection law can be found in this agreement. In the decades to come, the number of investment agreements grew with increasing speed and reached a total of more than 3200 agreements by the end of However, it was not until the late 1980s and early 1990s that a specific type of dispute settlement was introduced in investment treaties which allowed the investor, i.e. the foreign company, directly to file a complaint against the host state and seek arbitration between the investor and the state. The establishment of this system of investor-state dispute settlement turned investment agreements which had hitherto been mere tools of commercial diplomacy into legally enforceable instruments. Once the potential of ISDS proceedings had been realised by foreign investors the number of cases grew exponentially proving the tremendous popularity of this approach. 7 International agreements with investment protection, in particular with ISDS, establish a system of legal remedies which gives foreign investors a special right to sue directly the state in which they invested based on the allegation that the state violated the substantial terms of the investment treaty. The unique features of this system are: No mediation of the investor through its home state: The investor does not have to rely on activities of the home state, i.e. the state where the investor is registered or headquartered, to begin arbitration against the host state. In a system of interstate dispute settlement such as the WTO system, private actors always need to convince their home state to raise a complaint on their behalf. Alternative to the national system of legal remedies: the investor may choose whether to sue the host state in local courts or whether to move directly to ISDS. There is generally no requirement to resort to the domestic legal system before turning to an international tribunal. Traditionally the so-called exhaustion of local remedies is a precondition for an international court or tribunal to hear a case. 8 It is also a central element in accessing human rights courts. Exclusive access for foreign investors: Invetor-state dispute settlement is only available to investors protected under an international investment agreement. Even if they directly compete with the foreign investor, domestic companies have no standing in such proceedings. This may even lead to a distortional effect on the competitive relationship between foreign and domestic enterprises. Awards are pecuniary damage only: investment tribunals typically award compensation in the form of damages. They do not require a state to withdraw or change the measure that violated the investment agreement. Usually, international courts and tribunals issue verdicts which state a violation of international law and require the responding state to change its measures or policy. Ad hoc composition of tribunals: Unlike domestic and international courts, investment tribunals are constituted for each individual case and are usually composed of highly specialised lawyers from international law firms. 6 UNCTAD, Investing in the SDGs: An Action Plan World Investment Report 2014, p UNCTAD, Investing in the SDGs: An Action Plan World Investment Report 2014, p Crawford/Grant, Local Remedies, Exhaustion of, Max Planck Encyclopedia of Public International Law, February 2007, para 5, ouplaw.com/home/epil.

9 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 7 Confidentiality of the proceedings and the outcome of the case: in line with general practice in commercial arbitration, proceedings of an investor-state arbitration tribunal have traditionally been confidential unless the parties agreed otherwise. This means that not all cases are known, awards are not always published and in many cases the proceedings themselves are not open to the public. This short overview already indicates that there are a number of fundamental problems associated with investor-state arbitration. They concern the fact that ISDS places at a structural disadvantage domestic investors who have to seek remedies in the domestic legal system only and cannot opt to bypass local courts if they consider them to be inefficient or unfavourable to the cause of the investor. In addition, the general procedural elements of arbitration such as the ad hoc composition of the tribunals and the confidentiality of the proceedings disregard the inherently public nature of the subject of the disputes. Usually, the matters adjudicated by an investment tribunal concern issues of administrative and legislative regulation through laws, regulations and individual decisions. The judicial review of such measures based on individual rights is inherently a matter of public law. Consequently, it should be guided by principles of the rule of law, due process and judicial proceedings. 9 From a theoretical perspective, the fundamental problem of ISDS is the fact that it combines elements of an arbitration system with elements of a judicial review system. Arbitration as a tool of dispute settlement has its roots in ancient history and has been a useful and successful method of solving legal disputes in a variety of different settings. However, the basis of successful arbitration is the free consent of the two parties to the process. The consent usually concerns one or more disputes that have arisen or may arise between the two parties. 10 In short, arbitration is a consensual procedure to settle disputes. 11 Usually, the consent is given in a specific contract or treaty or the consent is based on an ad hoc agreement. In both situations, consent to arbitration is given in the light of a specific contract or treaty with a specific party or in the light of a specific dispute. Consequently, consent to arbitration rests on the assumption that the parties know each other before they consent to arbitration. ISDS, however, is based on the state party s prior consent to any claim a current or potential investor may file. In essence, the state parties to an investment protection agreement with ISDS consent to arbitration with an unknown number of investors who may have invested or may invest in the future in their countries. Whilst the investor will always know who the other party of the arbitration is (the state), the state will only know who the other party is when the complaint is registered because consent to arbitration is given a priori in the investment treaty. This structural ambiguity of ISDS is not the main focus of the public opposition and academic critique of the system. Instead, the potential or actual impact of ISDS on national regulations and regulatory space are at the heart of the current debate. Due to the open and broad wording of the substantive provisions and their equally broad interpretation by investment tribunals, the subject matter of investment disputes is not restricted to direct expropriation and open discrimination, but also to regulatory measures. As a consequence, governments may be faced with large claims for compensation, which may lead to a regulatory chill effect. In addition, investment claims can be used as instruments to influence administrative proceedings in favour of the investor. They may also become an additional burden in the domestic legislative process. As investment disputes concern actions or omissions of the state and not of private actors, collective bargaining or agreements of the social partners could not become a direct target of ISDS. However, an investor might claim that the omission of state action in this context could be a violation of an investment agreement. Hence, ISDS may also have an indirect effect on labour regulations based on collective agreements. 9 Van Harten, Investment Treaty Arbitration and Public Law, See e.g. Article 7 of the UNCITRAL Model Law on International Commercial Arbitration: disputes between them i.e. between the parties of the agreement to consent to arbitration. 11 Bower, Arbitration, Max Planck Encyclopedia of Public International Law, February 2007, para 1,

10 8 FRIEDRICH-EBERT-STIFTUNG III. Necessity of investment protection in TTIP or CETA in particular Even if one does not share the general critique of investment protection and ISDS one may question whether investment protection is necessary in an agreement between the EU on the one side and the US or Canada on the other side. Proponents of this approach such as the European Commission or the United States Trade Representative do not argue that the Canadian, US, or EU legal systems do not provide sufficient legal protection to businesses. While there may have been individual court cases in which the foreign identity of an investor may have had a negative impact on the outcome of the case, there is certainly no widespread and systemic disregard of the rule of law in either of these legal systems. It is also not very likely that US or Canadian investors have been deterred from investing in the EU or that European investors have been deterred from investing in the US or Canada because of the lack of an investment protection agreement between the two sides. Hence, even the traditional argument in favour of investment agreements in a North- South context does not seem convincing in the EU- US or EU-Canada context. 12 While many observers agree with these positions, they nevertheless insist on the inclusion of investment protection in an EU-US agreement in particular for two reasons: first it is argued that including an investment chapter with the elements suggested in the consultation document would be a major step in the process of reforming investment law while excluding investment protection from the TTIP would be a major setback for the entire system. In essence, this argument claims that a reformed investment protection chapter in TTIP would have a systemic benefit for the investment protection regime in general. The second position holds that without investment protection in TTIP, the EU cannot ask for investment protection in other negotiations e.g. with China or India. This position is based on the idea that the EU must display political evenness vis-à-vis its trading partners in international investment and trade negotiations. Neither argument is convincing: first, it should be noted that most reforms proposed by the EU in the consultation document have already been im plemented in other investment agreements and model BITs (such as the Canadian model BIT) or are being discussed in various forums including UNCTAD s Investment Framework for Sustainable Development. It is unlikely that excluding an investment protection chapter from the TTIP or the CETA would significantly impede the reform of the system. In fact, excluding investment protection from these agreements might even support those reforms because this would indicate that investment protection chapters are not always the best and only solution. Second, even if one assumes that an investment chapter in agreements with other trading partners is necessary, investment protection in the TTIP is not a prerequisite. In fact, trade and investment relations between European and North American OECD countries traditionally did not involve investment protection agreements. In addition, countries such as Australia have shown that a country can credibly exclude investment protection from a trade agreement with one country (e.g. the US- Australia FTA) and still include it in an agreement with another country (e.g. the Korea-Australia FTA). There is no plausible reason why the EU could not follow a similar path. In fact, it might even be possible that in negotiations with China, China itself will insist on ISDS in an investment agreement even if TTIP contains no investment protection chapter or at least no ISDS. 12 It should be noted that there is no clear empirical evidence that investment agreements actually attract foreign investment even in developing countries, see Hallward-Driemeier, Do Bilateral Investment Treaties Attract FDI? Only a Bit and They Could Bite, in: Sauvant/Sachs (eds), The Effect of Treaties on Foreign Direct Investment, 2009, p

11 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 9 IV. Substantial aspects of investment protection 1. Scope The scope of an investment protection agreement or chapter defines which companies and which types of economic activities are protected by the agreement. This definition is of vital importance because it also determines who has access to ISDS. Usually, the scope is determined by definitions of the terms investor and investment at the beginning of an investment agreement or chapter. a) Investment The definition of the terms investment and investor according to the EU s approach is intentionally very broad. 13 The definition of investment is asset-based which means it is based on economic interests and values and not on enterprises. 14 Using an asset-based approach leads to a wide scope as it covers not only enterprises and equity participation in an enterprise but also debt instruments, interests arising from concessions and contracts, intellectual property rights and claims to money or claims to performance under a contract. The definition of investment is not restricted to long lasting foreign direct investment (FDI), but includes also short-term portfolio investment even if it is purely for speculative reasons. 15 A lasting or significant interest in a foreign enterprise is not a necessary element of the definition of investment. It has been pointed out that such a broad approach also covers sovereign debt instruments even if they were only acquired by speculative investors. This could make it difficult to restructure government debt as investors could challenge measures which substantially decrease the value of government bonds ( haircuts ). 16 This is not just a theoretical problem as investors in Greek government bonds are currently filing complaints against Greece on the basis of investment protection treaties. 17 A group of critical legal scholars has therefore argued that sovereign debt instruments should be excluded from the scope of an investment agreement or chapter. 18 The EU s approach excludes investments which are not made in accordance with the applicable law at the time the investment was made (known as the clean hands doctrine ). This is based in parts on existing international treaty and arbitration practice. 19 In the prominent Yukos case 20, the tribunal considered this to be a general principle of investment law: In imposing obligations on States to treat investors in a fair and transparent fashion, investment treaties seek to encourage legal and bona fide investments. An investor who has obtained an investment in the host state only by acting in bad faith or in violation of the laws of the host state ( ) should not be allowed to benefit 13 Public consultation on modalities for investment protection and ISDS in TTIP, Consultation document, docs/2014/march/tradoc_ pdf, p On the difference see UNCTAD, Scope and Definition, UNCTAD Series on Issues in International Investment Agreements II, 2011, p Geiger, The Transatlantic Trade and Investment Partnership: A critical perspective, Columbia FDI Perspectives, No. 119, April 14, 2014, Bianco, The Bitter End of Sovereign Debt Restructurings: The Abaclat v. Argentina Arbitration and the Eurozone Crisis, LIEI 2013, pp Glinavos, Haircut Undone? The Greek Drama and Prospects for Investment Arbitration, Journal of International Dispute Settlement 2014, p Statement of Concern about Planned Provisions on Investment Protection and Investor-State Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP), 19 UNCTAD, Scope and Definition (fn. 14), p The Yukos case been hailed as a successful example of how investment arbitration can be used to limit the powers of a non-democratic government. However, it should be noted that the claimants of the case were not individuals who suffered from President Putin s arbitrariness, but commercial companies registered in Cyprus and the Isle of Man.

12 10 FRIEDRICH-EBERT-STIFTUNG from the Treaty. 21 Consequently, activities which were illegal at the time the investment was made would not be protected by the agreement. In its consultation document, the Commission notes that this requirement would allow investment tribunals to refuse to grant protection to investments made in breach of domestic law. 22 Yet, it should be noted that the consequence of excluding investments which do not fulfil this requirement is obligatory and not within the discretion of the tribunal. 23 b) Investor The definition of an investor in the EU s approach is also relatively broad, but limited to enterprises with substantial business activities. This is a welcome clarification and restriction of the scope of the investment chapter as it would exclude companies which are only formally incorporated in the United States (or Canada in the case of CETA) but maintain no commercial presence in the US. As a consequence, mailbox companies would not be covered by the chapter on investment protection. However, it is unclear what is meant by substantial business activities. It would therefore be left to an investment tribunal to decide whether the activities of an enterprise in a particular country are sufficient to turn the enterprise into an investor of that country. It should also be noted that the exclusion proposed by the European Commission does not exclude all US companies with foreign parents. In fact, as long as a company is engaged in substantial business activities in the US it would be considered a US investor for the purposes of the TTIP investment chapter even if its shareholders are not US citizens. 2. Non-discrimination Investment protection agreements and chapters usually contain two principles of non-discrimination. The first of these principles, most-favourednation (MFN) treatment, obliges the parties of the agreement to treat foreign investors of one country no more favourably than investors of the other party of the agreement. In other words, the EU may not treat US investors less favourably than e.g. Chinese investors. The second non-discrimination principle, national treatment, prohibits more favourable treatment of domestic vis-à-vis foreign investors. Hence, EU investors may not be treated more favourably than US investors. a) Most-favoured-nation treatment Experience of existing investment agreements has shown that the standard of most-favoured-nation treatment has been especially problematic. In the past, investment tribunals have allowed investors to base their claims on more favourable clauses in other investment protection agreements arguing that denying this treatment would be less favourable compared to the treatment afforded under the other investment chapter. In general, investment tribunals have embraced this approach and have hence broadened the scope of investment protection beyond the standards agreed upon in the respective agreement ( importation of standards ). 24 The European Commission seems to be aware of this problem and has introduced language which would limit the possibility of importation of standards through the most-favoured-nation (MFN) clause. 25 However, a closer look at the text of the relevant proposal reveals that the EU s limitation 21 Hulley Enterprises Limited (Cyprus) and others v. The Russian Federation, PCA Cases No. AA 226, 227 and 228, Final Award of 18 July 2014, para Consultation document (fn. 13), p Statement of Concern (fn. 18). See also Hulley Enterprises Limited (Cyprus) and others v. The Russian Federation (fn.21), para UNCTAD, MFN, UNCTAD Series on Issues in International Investment Agreements II, 2010, p European Commission, Consultation document (Fn.13), p. 4.

13 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 11 only covers procedural provisions of other investment agreements. 26 As a consequence, a foreign investor may not rely on procedural privileges which have been given to foreign investors in other agreements. However, the EU s approach fails to impose the same limitation on substantial provisions. This means that investors may still import standards from other agreements if they are substantial in nature. For example, the EU s approach towards the standards of fair and equitable treatment and indirect expropriation is stricter than in other more traditional investment agreements. These restrictions could be circumvented if the MFN clause does not exclude the importation of substantial standards from other investment agreements. In the EU context, this is especially problematic because the investment protection chapter of the Energy Charter Treaty contains much broader substantial standards and could therefore be used by investors in the TTIP if the MFN clause does not exclude substantial standards as well. b) National treatment Another problem posed by the non-discrimination standards concerns national treatment and has to do with de facto discrimination. This refers to laws and other government measures which do not formally treat foreign and domestic companies differently, but which may nevertheless have a discriminating effect on foreign investors. The EU s draft text contains no further definition of the scope of de facto discrimination. In particular, even general laws which have de facto a discriminatory effect could be a violation of the non-discrimination clauses. This is to be criticised in particular since there are examples in other investment protection treaties which define de facto discrimination in a more restricted way. 27 The national treatment obligation applies to the establishment, acquisition, conduct, operation, management, maintenance, use, enjoyment and sale or disposal of their investments in its territory. In other words, national treatment covers both the pre- and post-establishment phases. However, this does not amount to a right to establishment which depends on the scope of market opening in the relevant sector. In the CETA and potentially also in the TTIP, this will be regulated in a separate chapter on establishment. c) Exceptions Most investment agreements do not contain general exception clauses. Consequently, once a measure is considered a violation of a standard such as national treatment or fair and equitable treatment, governments cannot defend the measures as a justifiable exception to these provisions. Contrary to this, international trade agreements usually contain such exceptions which have been used to balance the principles of trade liberalisation with the requirements of national regulatory autonomy. The EU proposes to include general exception clauses based on the respective provisions of WTO agreements (Art. XX GATT and Art. XIV GATS) in the investment chapters of the CETA and the TTIP applicable to national treatment and most-favoured nation treatment. This would allow states to defend discriminatory measures taken for specific legitimate policy goals provided that the measures are necessary and that their application is not discriminatory and does not constitute a disguised restriction on trade. However, the scope of the exception clauses in the EU s approach is limited to those policy goals mentioned in Art. XX GATT and Art. XIV GATS. Generally, these include public order and public security measures, health and safety measures and environmental measures. Social and labour policy measures are not covered. In other words, if social and labour laws were to have a discriminatory effect on foreign investors, they might 26 See Art. X.2 (4) of the consultation document: For greater certainty, the treatment referred to in Paragraph 1: a. does not include investor-to-state dispute settlement procedures provided for in other international investment treaties and other trade agreements, including compensation granted through such procedures ( ) 27 UNCTAD, National Treatment, Series on Issues in International Investment Agreements, 1999, p

14 12 FRIEDRICH-EBERT-STIFTUNG not be justifiable under the general exemption clauses. The same holds true for general measures aimed at the protection of essential public services. Finally, as is the case with the relevant WTO provisions, the proposed exception clauses contain an introductory clause (the chapeau ) which subjects the application of any measure to a proportionality test. As this test would be applied and administered by an investment tribunal, it is safe to claim that the ultimate act of balancing the investment restriction and how the measure contributes to certain policy goals would be left to these adjudicatory bodies. 3. Fair and equitable treatment (FET) The requirement of fair and equitable treatment is a traditional investment protection standard and can be found in virtually all investment agreements. Extensive interpretations of this standard in past investment arbitration awards turned this standard into a weapon against domestic laws and other regulatory measures. The most important element of this standard concerns the legitimate expectations of the investor 28 which can be based on the legal framework in general 29 or on the behaviour of officials. 30 Another important element of FET is the maintenance of a stable legal and business environment. 31 These interpretations include a presumption against changes and reform and are therefore especially problematic from a social and labour regulation perspective. The European Commission acknowledges the problems associated with the broad interpretation of FET and rightly aims at a limited scope of this standard. In particular, the EU s approach is based on a closed list of specific situations such as denial of justice, fundamental breach of due process, manifest arbitrariness, targeted discrimination on manifestly wrongful grounds or abusive treatment of investors. In addition, the EU s approach would allow the parties of the agreement (i.e. the US and the EU in the case of the TTIP) to adopt a decision to include further elements of the fair and equitable treatment obligation. The proposed list would clearly reduce the scope of this clause and lessen its potential to curtail regulatory policies. Yet, it should be noted that the list still contains a number of open terms such as manifest arbitrariness or fundamental breach of transparency. In the past, a number of investment tribunals have based their decisions more on previous case law than on variations of treaty language. Hence, it cannot be predicted whether and to what extent the list proposed by the EU to define FET would reduce the impact of this standard on domestic regulatory autonomy. Furthermore, the EU s approach towards FET would also include a clause stating that, the tribunal may take into account whether a party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated. This provision reintroduces the notion of the frustration of legitimate expectation into the definition of FET. It is difficult to see how this could be reconciled with the closed list proposal for defining FET. A systematic and logical interpretation would suggest that the FET standard only applies if a state made specific representations not to deny justice or to fundamentally breach due process. Such an interpretation does not seem practical and it is hence likely that tribunals will predominantly or even only rely on specific representations and legitimate expectations. This would be problematic as states usually make a number of representations to induce investment and they are not always made by the competent officials. A federal invest- 28 The investor s legitimate expectations are the dominant element of the fair and equitable treatment according to standard according to the tribunal in Saluka Investments B.V. v. Czech Republic, UNCITRAL Arbitration, Partial Award of 17 March 2006, para CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Award of 12 May 2005, para Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000, paras 85 et seq. 31 CMS Gas (fn. 29), para 274.

15 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 13 ment promotion authority, for example, could indicate to the investor that obtaining local licenses will be possible or that exemptions from certain labour and social regulations might be granted without first consulting the competent authorities. It is possible that an investment tribunal might ask the question of whether this created legitimate expectations which were later frustrated. It would have been better if the EU s draft had specified that only representations by competent authorities could create legitimate expectations. This is also a general principle of administrative law. be problematic from a regulatory perspective, the notion of indirect expropriation has been used to challenge measures of a general and regulatory nature. However, the exact contours of indirect expropriation remain unclear and have been contested. 34 Regulatory expropriation denotes regulatory measures which generally aim (or are said to aim) at public interests but which deprive the investor of the commercial value of the investment. This notion makes the potential for conflict between investors rights and regulatory autonomy clearly visible. In the context of the FET standard, the standard of full protection and security is also relevant. It has sometimes been interpreted together with the FET standard as one single standard or as a standard with a similar broad meaning. 32 The EU s approach usefully limits this standard to the protection of the physical security of investors and covered investments. As a consequence, non-violent demonstrations, peaceful blockades of factories or strikes can under no circumstances be considered a violation of the standard of full protection and security even if they have an effect on a factory s daily business. 4. Expropriation Protection against uncompensated expropriation is the historic root and raison d être of international investment protection. In fact, legal remedies against expropriation understood as the outright taking of property by the state have been the main focus of international investment law throughout the 20th century. 33 Usually investment agreements cover direct and indirect expropriation. While the former is usually not considered to The European Commission rightfully addresses this problem. The proposed text covers direct and indirect expropriation, but in order to achieve greater legal clarity these terms are further defined in an Annex on Expropriation. This technique follows the approach of North American investment agreements 35 and can also be found in the 2004 Canadian Model BIT. 36 In fact, the definition of indirect investment in the EU s approach is largely identical to the Canadian Model BIT. According to the definition in the annex, indirect expropriation is a measure or a series of measures with an effect equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure. 37 This is a standard and broad definition of indirect expropriation based on previous case law and legal doctrine. The definition is further specified by a list of factors which should be taken into account when determining indirect expropriation. These include the economic impact, the duration and the character of the measure as well as the extent to which the measure interferes 32 Cordero Moss, Full Protection and security, in: Reinisch (ed), Standards of Investment Protection, 2008, pp Reinisch, Expropriation, in: Muchlinski/Schreuer/Ortino (eds), The Oxford Handbook on International Investment Law, 2009, p Técnicas Medioambientales Tecmed S.A, v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, para. 114; Dolzer, The Impact of International Investment Treaties on Domestic Administrative Law, NYU Journal on International Law and Politics 2005, p UNCTAD, Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012, S Annex B.13(1) Canada 2004 Model BIT. 37 Consultation document (fn. 13), p

16 14 FRIEDRICH-EBERT-STIFTUNG with reasonable investment-backed expectations. The text also clarifies that the sole fact that a measure has an adverse effect on the economic value of an investment is not sufficient to establish an indirect expropriation. Finally, the annex adds a further clarification which states that measures designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations except in rare circumstances. These circumstances are characterised by a severe impact of the measure which appears manifestly excessive. Whilst it is positive that the Commission s proposal clearly rejects the so-called sole effects -doctrine which would only assess the effects of a measure to determine whether it amounts to indirect expropriation, the definition uses a number of unclear and broad aspects which may provide investment tribunals with the possibility of assessing many general regulatory measures on the basis of protection against indirect expropriation. For example, when assessing the character of a measure the tribunal shall be looking at its object, context and intent. This could be (mis)understood by a tribunal to evaluate the measure from a general policy perspective and determine whether the object and intent were legitimate. In addition, the notion of manifestly excessive could invite tribunals to assess the measure from the perspective of the proportionality principle. 38 This would give an investment tribunal an overly broad authority to review domestic laws and regulations based on the tribunal s own assessment of the measure s necessity and its relation to the goal that the measure pursues. Finally, the definition again makes a reference to the legitimate expectations of the investor. However, in the context of expropriation, these expectations must be investment-based. In other words, expectations which are solely based on presumptions and discussions with national authorities before the investment was made would not amount to indirect expropriation. In short, it might even be possible that the new definition of indirect expropriation could be broader than the definition of FET and therefore establish a new boom of indirect expropriation. 5. Right to Regulate As indicated at the outset and throughout this study, the impact of investment agreements on domestic regulations is the most contentious substantial issue concerning investment protection in TTIP and CETA. Its impact depends on a number of factors and elements of the agreement. These concern the scope of the investment protection chapter and the definition of the substantial standards such as non-discrimination, FET and expropriation. Furthermore, the scope of general exception clauses is relevant. As already mentioned, the general exclusion clauses of the EU s approach only apply to non-discrimination clauses (national treatment and MFN), but not to other provisions or to the chapter in general. In addition, they only cover a limited set of policy goals. In particular, there is no clause which would exempt public interest objectives such as fundamental labour rights, protection of public, health, security, rights of employees, social legislation, human rights, financial market regulation, industrial, policy and tax policy and environmental protection from the standards of investment protection. In the context of the right to regulate, the European Commission also refers to the usual exclusion of audiovisual services from the chapter on investment and services and the so-called prudential carve-out which serves to protect measures taken for prudential reasons in financial services. Both clauses have been used in trade agreements for many years and have not contributed significantly to the protection of the right to regulate. 38 Statement of concern (fn. 18).

17 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 15 However, it should be noted that the EU approach does not contain a so-called umbrella clause which incorporates all other legal claims, including contractual ones, of the investor into the realm of the investment agreement. 39 Due to the potentially broad scope of the umbrella clause and its impact on regulatory autonomy, the omission of this clause in the EU s approach is important and to be welcomed. In order to balance the right to regulate with investment protection, the European Commission seems to place a great deal of emphasis on the preamble of the agreement. This preamble contains a reference to the parties right to take regulatory measures. However, the preamble of an international agreement contains usually only non-binding language and is hence often of limited practical value. In fact, the explicit reference to the right to regulate in the GATS Preamble has not been applied in WTO disputes concerning the impact of the GATS on domestic regulations. Interestingly, the preamble of the EU approach also mentions the OECD guidelines for multinational enterprises. 40 However, this reference is extremely weak. It only states the desire of the parties to encourage enterprises to respect these standards. This is even weaker than the text of the OECD Guidelines itself which recommend the observation of the guidelines. 41 Generally, it would be possible to link the adherence of an investor to international standards to its protection through an investment agreement. For example, an investment agreement could state that only investors who adhere to the OECD guidelines or other standards would have access to investor-state-arbitration. Such an approach could be realised in the same manner as the clean hands -doctrine Van Haersolte-Van Hof/Hoffmann, Relationship between International Arbitral Tribunals and Domestic Courts, in: Muchlinski/Ortino/Schreuer (eds), The Oxford Handbook of International Investment Law, 2009, p. 974 et seq. 40 Consultation document (fn. 13), p OECD Declaration on International Investment and Multinational Enterprises, 25 May 2011, 42 See above III. 1. a)

18 16 FRIEDRICH-EBERT-STIFTUNG V. Procedural aspects of investment protection: ISDS While the substantial provisions of an investment protection agreement or an investment chapter in a free trade agreement define whether or not a national measure violates international investment law, the dispute settlement provisions determine whether such a violation can actually lead to a binding legal decision. Until the late 1980s, dispute settlement in international investment agreement was based on interstate proceedings, i.e. disputes between the host and the home states. As states are generally reluctant to sue each other, hardly any cases were decided in that way. The introduction of investor-state dispute settlement in the 1990s, notably through NAFTA and some modern BITs, allowed foreign companies to lodge claims directly against the host state before an ad hoc arbitration tribunal. Investor-state dispute settlement is now also at the heart of the public opposition against investment protection in CETA and TTIP. The EU s approach reacts to most of the recent arguments against ISDS and proposes a number of new elements while retaining the essence of ISDS. 1. Transparency in ISDS ISDS in investment agreements is often criticised because of its lack of transparency. Tribunals do not meet in public. The publication of awards is not mandatory. Other documents such as the complaint are usually not published. Depending on the applicable arbitration rules, it may not even be known publicly that the hearing took place at all. In order to introduce more transparency, the European Commission proposed to include the 2013 UNCITRAL Rules on Transparency in Treaty-based Investor-State-Arbitration 43 as mandatory rules in any ISDS under CETA or TTIP. The 2013 UNCITRAL Transparency Rules are the result of three years of negotiations in the UNCITRAL Working Group on Investment Arbitration. The new rules which came into effect in April 2014 require the most significant documents of the case to be published such as briefs and statements of the parties including annexes and all decisions of the tribunal. The EU s approach would include even more documents such as the intent to challenge an arbitrator or the agreement to mediate. Furthermore the investment arbitration tribunals have the right to receive submissions from a third person, i.e. a person that is neither a disputing party nor a party of the TTIP or CETA. In practice, these third persons could be NGOs with an interest in the outcome of the proceedings and who wish to submit so-called amicus curiae briefs. Finally, all hearings would be public. There are a number of exceptions to these transparency requirements, in particular so as to protect confidential business information. It is left within the discretion of the tribunal to determine whether these exceptions are applicable. Incorporating the UNCITRAL Transparency Rules into CETA and TTIP and making them binding for all ISDS cases arising from these agreements would be a major improvement compared to previous EU Member States investment treaties and might significantly change the current investment dispute settlement regime. It is to be welcomed that the EU s approach embraces the most far-reaching transparency rules for investment arbitration that exist today. In fairness, it should be said, however, that many of the standards that have been incorporated 43 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration (effective date: 1 April 2014), en/uncitral_texts/arbitration/2014transparency.html.

19 Modalities for investment protection and Investor-State Dispute Settlement (ISDS) in TTIP from a trade union perspective 17 into the UNCITRAL Rules already exist in the context of some North American investment agreements. ment cases were decided by a group of 15 lawyers. 45 Many arbitrators are recruited from a small number of specialised international law firms. There are a few open questions concerning the 2013 UNCITRAL Transparency Rules and their modest modification in the EU s approach. In particular, the language could have been more specific in places. For example, Article 6 (3) gives the tribunal the right to hold all hearings in private if this becomes necessary for logistical reasons. It is unclear how an investment tribunal would interpret the term necessary for logistical reasons. Similarly, Article 4 (3) requires the investment tribunal to assess whether a third party would have a significant interest in the arbitral proceedings. The meaning of these terms could be specified further in the investment protection chapter or the investment agreement itself and not left for an investment tribunal to decide. 2. Selection and qualification of arbitrators The selection and role of arbitrators has been at the centre of the public critique of ISDS alongside the lack of transparency. Investment tribunals are usually composed of three arbitrators. 44 Each disputing party (i.e. the investor and the responding state) usually selects one arbitrator and the two then select a third member who will serve as a neutral chairperson. Members of an investment tribunal are therefore not permanent judges with a fixed salary and personal independence, but are practicing lawyers and sometimes retired judges, diplomats or academics. Due to the specificities of the legal field, the number of individuals who have gained significant experience and know-how to manage these claims is limited. One study convincingly showed that about half of all known invest- As many arbitrators also serve as counsel for investors or governments in other cases, it has been argued that this leads to conflicts of interests and an institutional bias of ISDS towards the interests of the investors. 46 Since ISDS can only be initiated by private companies, arbitrators have an interest in generally serving corporate interests if they want to keep the system alive. If tribunals decide too often in favour of governments, investors will eventually lose interest in filing ISDS claims. The EU approach attempts to address this problem by drawing up a special roster for arbitrators. This roster shall be established by the TTIP Committee on Services and Investment. However, arbitrators are only selected from the roster if the tribunal has not been constituted within 90 days after the claim has been filed. The roster would therefore be voluntary and not mandatory. In practice, the roster would only be relevant if the two parties (i.e. the investor and the state) could not agree on the chair of the tribunal, because only the chair needs to be appointed by agreement. The other two arbitrators are appointed by the parties. As it is unlikely that a party will not be able to select its own arbitrator, appointments from the roster will usually only concern the chair and only if there is no agreement regarding that person. It is hence very likely that the roster will not play an important role in practice. The EU s approach would also contain the requirement that an arbitrator has experience in public international law, in particular investment law. Expertise in trade law is also desirable. Other fields of international law such as labour or human rights law are not mentioned. In addition, the arbitrators need not be experts on the domestic law of the 44 Investment agreements and chapters also foresee the possibility of a sole arbitrator, but in practice most tribunals consist of three arbitrators. 45 Corporate Europe Observatory (CEO), Profiting from injustice How law firms, arbitrators and financiers are fuelling an investment arbitration boom, 2012, p. 38 et seq.. 46 Van Harten (fn. 9), p. 167 et seq.

20 18 FRIEDRICH-EBERT-STIFTUNG responding state even if the case involves highly complicated issues of tax, environmental, social or labour law. In order to avoid a conflict of interests, arbitrators shall comply with the International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration and a Code of Conduct for arbitrators adopted by Committee on Services and Investment. However, it should be noted that the IBA Guidelines only relate to an individual conflict of interests, and not to systemic interest in upholding investment arbitration for the benefit of investors. Furthermore, the proposed code of conduct can only be adopted once the agreement has entered into force. The mandate for the drafting of such a code is quite broad. The EU s approach does not foresee further guidance through the contracting parties as to what behaviour should be regulated by the code and how it should be done. 3. Relationship of ISDS and domestic courts Traditionally, international law requires local legal remedies to have been exhausted before an international court or tribunal can be presented with the matter. 47 This is still the general rule in proceedings before human rights courts such as the European Court of Human Rights, but also before the International Court of Justice. The underlying rationale behind this principle is to allow the state to rectify an international wrongdoing through its own legal system first before turning to an international judicial or arbitral body. The principle of exhaustion of local remedies is not a principle of international investment law. 48 Most investment treaties or investment protection chapters do not require the investor to seek local remedies first. Instead, the very idea of ISDS is to provide the investor with a remedy that is not dependent on the use of national courts. This feature of ISDS has been heavily criticised as it allows foreign not domestic companies to circumvent the domestic legal system. Nevertheless, as this is the standard approach in almost all investment treaties, it should come as no surprise that the EU approach does not require the exhaustion of local remedies before relying on ISDS either. Surprisingly though, the European Commission claims in its consultation document that it favours domestic courts. 49 However, it is unclear how this favour translates into the EU approach. In fact, there are no incentives for the use of domestic legal remedies in the text. 50 The EU s approach employs what is known as a Fork-in-the-Road -clause which excludes in principle parallel proceedings before an investment tribunal and a domestic court. The investor must either declare that any claims before domestic courts have been terminated or that the claims have been settled through a final judgement. As a consequence, the investor cannot bring a claim to ISDS if there is a pending domestic case unless it is withdrawn. If there is no domestic case yet, the investor must also waive the right to bring a claim before domestic courts. However, if there has been a final judgement by a domestic court, the investor can bring the claim without any restriction. It seems that this rule could exclude behaviour such as that of the Swedish energy company Vattenfall which is challenging the German abolition of nuclear energy before an investment tribunal 51 and in the German Federal Constitutional Court through a constitutional complaint of its German daughter company 52 at the same time. However, the EU s approach only addresses situations in 47 Crawford/Grant, (fn.8). 48 Van Haersolte-Van Hof/Hoffmann (fn. 39), p Consultation document (fn. 13), p Statement of concern (fn. 18). 51 Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/ Kernkraftwerk Krümmel GmbH & Co ohg und Vattenfall Europe Nuclear Energy, 1 BvR 1456/12.